Exchange Rate Volatility in Post-Floating Regime in India

Exchange rate reflects the fundamentals of an economy in terms of relative export price and indicators of external stability. Volatility in nominal exchange rate spills over to the real sectors of the economy affecting output, employment and price stability. From this point of view, an assessment of exchange rate volatility assumes importance in studies on monetary and macroeconomics. This paper contains econometric analyses of the movements in INR-USD bilateral exchange rate in the post-floating period covering period from 1993 to 2009. Results of the GARCH, VAR and cointegrating VECM models confirm the existence of substantial volatility in the nominal INR-USD exchange rate evolving unilaterally and jointly with INR exchange rates against other international currencies such as EUR, JPY and CNY. Prima facie, this amounts to justify the relevance of managed float regimes for India as an intermediate solution to curb excessive volatility in nominal exchange rate